What are the implications for Form 1120S when an S Corporation donates a vehicle that was 100% business use and received no consideration, after taking full bonus depreciation?
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When an S corporation donates a vehicle that was used 100% for business, received no consideration, and for which the corporation previously claimed full bonus depreciation, several important tax implications arise for reporting on Form 1120-S and for the deduction passed through to shareholders. Here’s a comprehensive analysis based on the sources:
1. Deduction for Charitable Contribution
General Rule
- The deduction for a charitable contribution of property is generally the fair market value (FMV) of the property at the time of the contribution.
- However, if the property is “ordinary income property,” the deduction is limited to the property’s adjusted basis, not its FMV.
Ordinary Income Property
- “Ordinary income property” includes property that, if sold, would result in ordinary income or short-term capital gain. This includes property subject to depreciation recapture under IRC §§ 1245 and 1250.
- For a vehicle used 100% for business and fully depreciated (basis reduced to zero by bonus depreciation), the property is subject to depreciation recapture rules. If sold, the entire amount up to the original cost would be recaptured as ordinary income.
Effect of Full Bonus Depreciation
- If the S corporation took 100% bonus depreciation, the vehicle’s adjusted basis is likely zero at the time of donation.
- Under IRC § 170(e)(1)(A), the deduction for a charitable contribution of ordinary income property is limited to the lesser of FMV or adjusted basis. Since the adjusted basis is zero, the deduction is zero.
Summary Table: Deduction Calculation
2. Reporting on Form 1120-S
Schedule K and K-1
- The S corporation must report charitable contributions on Schedule K, line 12a (cash) or 12b (noncash), and provide details on Schedule K-1, box 12, to shareholders.
- For noncash contributions, Form 8283 must be completed and attached if the deduction claimed for the property exceeds $500.
No Deduction to Pass Through
- Since the deduction is zero, the S corporation would report the donation, but the amount passed through to shareholders as a deduction is zero.
Required Disclosures
- The S corporation should still provide the required information about the donation (description, date, donee, FMV, basis, etc.) on Form 8283 and attach it to the return and to each shareholder’s K-1, even if the deduction is zero.
3. Recapture and Gain Recognition
No Gain on Donation
- Unlike a sale, a charitable donation does not trigger depreciation recapture as income. Instead, the deduction is limited to basis, which is zero if fully depreciated.
No Ordinary Income Inclusion
- There is no requirement to recognize ordinary income on the donation itself, but the deduction is limited as described above.
4. Other Considerations
Substantiation
- The S corporation must obtain a contemporaneous written acknowledgment from the charity for any donation of $250 or more.
- For vehicles, Form 1098-C or a similar statement from the charity is required.
Shareholder Basis
- Since no deduction is passed through, there is no reduction to shareholder basis for this transaction.
5. Summary of Implications
- Deduction: The S corporation cannot claim a charitable contribution deduction for the donated vehicle because the adjusted basis is zero after full bonus depreciation.
- Reporting: The donation must still be reported on Form 1120-S, Schedule K and K-1, and Form 8283 must be completed and attached if required.
- No Recapture: No ordinary income is recognized on the donation, but the deduction is limited to basis, which is zero.
- Substantiation: Proper substantiation and acknowledgment from the charity are required.
6. Conclusion
When an S corporation donates a vehicle that was used 100% for business and fully depreciated via bonus depreciation, the charitable deduction is limited to the vehicle’s adjusted basis, which is zero. Thus, no deduction is available to the S corporation or its shareholders. The transaction must still be reported and substantiated as required by the IRS.
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